Exercise 10-2 Dropping or Retaining a Segment [LO10-2] The Regal Cycle Company m
ID: 2467726 • Letter: E
Question
Exercise 10-2 Dropping or Retaining a Segment [LO10-2]
The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow:
Mountain
Bikes
Management is concerned about the continued losses shown by the racing bikes and wants a recommendation as to whether or not the line should be discontinued. The special equipment used to produce racing bikes has no resale value and does not wear out.
What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.)
Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines.
The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow:
Explanation / Answer
Required 1a)
the impact on net operating income by discontinuing racing bikes = net operating income + loss of racing bikes - allocated fixed costs = 50100 + 21600 - 52000 =$19700 Net Operating Income on discontinuing racing bikes.
1b) No, the production and sale of the racing bikes should not be discontinued.
2a) Segment-wise Income Statement:
2b)
Yes, a segmented income statement format would be more usable to management in assessing the long-run profitability of the various product lines than any other format because it tells the company which segment is contributing and the fixed costs allocated to each.
Dirt Bikes Mountain Bikes Total Sales 265000 406000 671000 Less: Variable costs 112000 197000 309000 Contribution 153000 209000 362000 Less: Fixed Costs: Advertising 8800 40200 49000 Depreciation 20600 7500 28100 Salaries 40600 38400 79000 Allocated fixed costs 73537 112663 186100 Total fixed costs 143537 198763 342300 Net operating income (loss) 9463 10237 19700Related Questions
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